Value stocks have underperformed

Within European equities, I would say that the best opportunities over the next 12-18 months are going to be in the value end of the market.

This is a part of the market that has underperformed hugely over the last five or six years since the financial crisis. It has underperformed by so much that a lot of these stocks are very cheap now.

Focus on cashflow

I am selectively buying banks, insurance stocks, commodity-sensitive businesses, and telecoms that are perhaps a little bit economically sensitive but where I think I can get very good free cashflow.

Typically for a big oil company I’ll be buying it today on a low amount of cashflow, thinking that perhaps in five years’ time I can make 20% free cashflow yields, which is a very attractive potential return that I could make out of those businesses.

Quality and growth stocks look expensive

Then I look at the other half of the market – the higher quality, growth area of the market – where most European investors are focused and where most European funds are invested. I look at a lot of those stocks and actually find them quite expensive.

I think you’ve got a huge dispersion and a very interesting opportunity set within European equities between value stocks which are very cheap and look very attractive, and then growth stocks which are overvalued.

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